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Risk aversion and entrepreneurship under uncertainty: Further results

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  • Wong, Kit Pong

Abstract

The extant literature has shown that (i) the positive relation between assets and the rate of business startups and (ii) the increase in the relative return to risky entrepreneurship for the marginal individual when his assets increase are both driven by risk preferences that exhibit decreasing absolute risk aversion (DARA). In this paper, we contribute to the theory of entrepreneurship under uncertainty by proving that DARA is not only sufficient but also necessary for these two results. DARA as such plays an essential role for the understanding of the occupational choice between risky entrepreneurship (self-employment) and secure employment when uncertainty prevails.

Suggested Citation

  • Wong, Kit Pong, 2023. "Risk aversion and entrepreneurship under uncertainty: Further results," Economics Letters, Elsevier, vol. 230(C).
    • Handle: RePEc:eee:ecolet:v:230:y:2023:i:c:s0165176523002732
    DOI: 10.1016/j.econlet.2023.111248
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    References listed on IDEAS

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    1. Cressy, Robert, 2000. "Credit rationing or entrepreneurial risk aversion? An alternative explanation for the Evans and Jovanovic finding," Economics Letters, Elsevier, vol. 66(2), pages 235-240, February.
    2. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    3. Bonilla, Claudio A. & Vergara, Marcos, 2013. "Credit rationing or entrepreneurial risk aversion? A comment," Economics Letters, Elsevier, vol. 120(2), pages 329-331.
    4. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-638, May.
    5. Claudio A. Bonilla & Marcos Vergara, 2021. "Risk aversion, downside risk aversion, and the transition to entrepreneurship," Theory and Decision, Springer, vol. 91(1), pages 123-133, July.
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    More about this item

    Keywords

    DARA; Entrepreneurship; Risk aversion;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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